Editorial Policy

Sometimes, bankruptcy can actually be good

Erica Sandberg

February 5, 2014

QDear Erica,

Credit counseling was a bust. I could not include all of my debts, and the ones that I did include were of no benefit. My counselor was very nice, but she basically said I had to declare bankruptcy if I wanted to save myself. I do not want to do that. Is this really my only option in this crazy world? Please let me know if there is something else I can do — David

AHi David,

I'm sorry that your experience with the credit counselor wasn't what you expected. However, the problem may not have stemmed from the organization or the employee, but with your particular financial situation.

Credit counseling agencies offer debt repayment programs, which can be a fine way to deal with a specific type of creditor. For the most part, we're talking credit cards. If you've struggled with on-time payments, or your balances have been maxed out, your lenders may have increased the interest rates. Penalty interest rates can soar above 30 percent. Once they've been hiked to such a degree, paying the debt down can be a slow and agonizing process. So much of the payment goes toward the interest and fees (which may include late fees) that getting out of debt can seem impossible. Ask Erica

For this reason, nonprofit credit counseling agencies were developed to bridge creditor and debtor. They help delinquent, stressed-out borrowers get back on track.

If your accounts are mainly credit cards and you have enough money coming in to meet essential expenses, debt payments, and had at least a little left over for savings (the counselor would have determined this by creating a budget), you could have gotten a break from those high interest rates.

Many creditors have agreed to reduce or even eliminate interest and fees for clients in a credit counseling program. Payments typically are withdrawn from the client's checking account automatically, which the agency distributes to each creditor on time. Upon completion — arranged for fewer than five years — you'd be debt free and have an established, positive payment pattern on your credit report.

But that didn't happen for you. Maybe you had some accounts that were sold to collection agencies. Collection accounts are rarely included in credit counseling repayment plans, because those companies tend to reject partial payments. Or perhaps you owe legal fines, back-child support, tax debt or are behind on your car or home payment. None of these may be included in a payment plan.

Another possibility is that you simply don't have enough income to support debt repayment. It would not be in your best interest to promise creditors money when you can't make rent or feed your family.

Sometimes bankruptcy really is the best option, David. It's a hard pill to swallow, but when your finances are very sick, it can act as a viable cure. If your counselor was suggesting Chapter 7, it would enable you to walk away from certain debts and start fresh. Chapter 13 might have been mentioned if you wanted to save property (some of which is subject to a legal claim in a Chapter 7) while paying off some debts in full and discharging others.

As for options, an alternative to bankruptcy can include doing nothing at all. This is only appropriate if you have no money or assets now or in the foreseeable future that can be claimed by a creditor who has sued you. If they won the case, and garnishments, liens and levies are permissible in your state (and the judge allows them), inaction isn't a good idea. You might also get aggressive about securing a job that pays enough to satisfy your debts.

Finally, if you were truly unsatisfied with the person you met with, schedule a meeting with someone else. It's possible she was a dud. And, as you know, counseling is free, so you'll be out nothing by giving it another try.

Got a question for Erica? Send her an email.